This is a Guest blog post from Andre Averbug, an entrepreneur, economist, and writer who has been helping entrepreneurs prepare for their investor pitches for several years.
0. Title
Before the content slides, you need a slick title slide to catch people’s attention from the get-go. Include your company logo/name and perhaps a great picture that represents your mission or broader vision. I like it when companies also include a short sentence, such as a slogan or value proposition, that already gives the audience an idea of what the company is about. Mint’s title slide from its 2007 pitch is a great example.
1. Problem
Every startup should be focused on solving a particular problem – big or small. The first slide is the place where you explain what the problem is with facts and numbers. For ex, Breakthrough, a company that provides mental health services, laid out a clear problem statement that set the stage for why its business mattered. You can also focus the discussion of the problem on a typical customer or beneficiary, to make it more personable (“Mr. Smith has mental health problems, but he doesn’t feel comfortable sharing his illness with others and seeking help…”)
2. Solution
After the problem, of course, comes the solution. What is your company doing to solve the problem? This could be framed as a value proposition or the company’s broader vision but should also include specifics as to how your product or service is making people’s lives better. Gleamr, an app that provides professional auto detail on-the-go, laid out its solution very clearly.
3. Product / Service
Now is the time to describe in detail how your product or service works. Include screenshots, images, graphs, anything that helps the audience understand what is it that you’re offering. If the product is not ready yet, include pictures of the prototype or wireframes. If you provide a service, include a simple schematic showing how the service works. The example below is from Airbnb’s first pitch deck.
4. Business Model
Every investor will need to know how you plan to make money with your business. Explain how much you are charging your clients, for which offerings and, if other partners are involved, who takes how much of the profits. Gleamr makes it all very clear with a simple infographic.
5. Market Opportunity
How big is the potential market for your product or service? How many people in your country, region or even world could become paying customers? Talk about your target market, their overall characteristics and preferences. Learn about the concepts of TAM, SAM and SOM. Airbnb’s example below is good, but I personally prefer to present market size figures in dollars. Therefore, I would multiply the 84 million SOM (share of market) by the average amount charged for a trip (for ex, if the average trip is $100, total SOM would be $8.4 billion).
6. Marketing
You need to show investors you have a clear plan to attract and retain customers. What is your go-to-market strategy? How will you reach out to potential customers? Will you use social media, paid ads, attend conferences, blog etc.? Gleamr actually went beyond and included information on “staying competitive”, with insights about product development – however, in most cases, focusing on marketing and sales and saying a few words about keeping customers is enough.
7. Competition
Who are your (direct and indirect) competitors? Never say you don’t have any, it is simply not true! How do you differ from them? What is your competitive advantage? To convey the message in a clear way, many companies use graphs plotting down competition across different axes (e.g.: price, quality, speed, customer experience) or a table that compares specific features across products.
8. Traction (and/or Financials)
What have you accomplished so far? Let numbers tell the story. How many active users and paying customers do you have? How much revenue? Have you broken even yet? What is your EBITDA margin? If you’re very early stage, what partnerships have you developed? Have you won any relevant award (e.g.: innovation, product development)? Have you been selected to an accelerator/incubator? Do you have an MVP? Have you run a successful pilot and, if so, what were the results?
9. Team
Many investors bet more on the jockey (i.e., entrepreneurs) than the horse (i.e., company). But even if they don’t, you need to show them you are the best team out there to execute this wonderful business plan. Include up to 5 people maximum and be sure to use nice pictures and include short bios in bullets. This is a good time to share your passion for what you’re building and talk about how great you complement each other and work together.
10. Financial Projections and Ask
Finally, it is time to show what you plan to accomplish in the next few years and what you need to get there. Include a table or graph showing your financial projections (revenues and EBITDA or net income should suffice for a short pitch) for the next few years – I personally stop believing in year 3. Explain how much money you need to reach your goals. Include a use-of-funds table or pie-chart, such as the one below, to show exactly how you plan to spend the funds you’re raising.
Finally, if you didn’t have your contacts and company website at the bottom of each slide, you might want to wrap up the presentation with a “Thank you!” slide including contact information.
The slides above and their order are of course suggestions only. The ultimate number and content of slides are dependent on the time available to present, whether you are presenting in an event with multiple companies and investors or to one investor only, if the audience already knows your business, among other factors. In any case, I consider these ten pieces of content to be the backbone of most investor pitches.
Good luck!
Image: freepik.com
Andre Averbug is an entrepreneur, economist, and writer. He has over two decades of international experience working in the intersection of economic development, entrepreneurship, and innovation. He has worked and lived in multiple countries across North and South America, Europe, Africa, and Central Asia.
Andre has started and run four startups, in Brazil and the US, and was awarded Global Innovator of the Year in 2009 by World Bank’s infoDev. He has extensive experience supporting companies as mentor and consultant, both independently and as part of incubators such as 1776 and the Kosmos Innovation Center, and programs like Shell LIVEWire, StartUp Weekend and WeXchange.
As an economist, Andre has worked in topics ranging from innovation ecosystems, entrepreneurship and MSME development policy, competitiveness, business climate, infrastructure finance, monitoring and evaluation (M&E), and country assistance strategy for the World Bank, the Inter-American Development Bank (IDB), and the Brazilian Development Bank (BNDES). He has also consulted for clients such as DAI Global, the Economist Intelligence Unit (EIU), TechnoServe, among many others. He holds a master’s degree in economics from the University of London (UK) and an MBA from McGill University (Canada). Andre lives in the Washington, DC area.
This is a Guest blog post by William E. Dyess, “Pitchmaster General” and Principal at TXN Advisors, a Washington, DC-region business consulting firm that provides corporate development, marketing and strategic advisory services.
This post is an analysis of the last 50 pitch decks we received at The Dyess Group’s deck review portal and our strategy on building a winning deck.
The Basics of Deck Building
At The Dyess Group (TDG) we generally follow the Sequoia Pitch Template when building decks for clients, but with our own spin. Whether you use the Sequoia template or not, it is important to follow a thoughtful narrative flow that induces and compels the reader to take the desired action. There are several effective, proven models and suggestions such as the Dale Carnegie Transactional Selling Steps from the 1950s:
Attention (What is the sizzle?)
Interest (Why does it matter? Why does the world need you? )
Desire (Are you better than a traditional solutions to the same problem?)
Conviction (How do you handle objections, what’s the traction?)
Action (Ask for the order, go for the close!)
The important practice here is to design a narrative flow that you believe fits your company the best and make it yours. Below we will present what we have found are the elements often forgotten, missed, or misunderstood when building an effective narrative flow. We do this using the first three slides of the Sequoia model.
Tip #1: Make sure people understand what you do, as quickly as possible (Don’t Waste Your Title Slide!)
We usually don’t hear about what the product or service does until the 5th slide.
The single most important thing you can do in your deck is to make sure people understand what you do. It needs to be in layman’s terms — meaning without using a lot of “marketing speak” and it needs to happen immediately.
When an investor, or any audience, clearly understands what you do, it provides much needed context to the rest of your story. The following is a front slide example from a deck The Dyess Group created for its client company Guac.
An example front slide from a Dyess Group deck
Here is another example illustrating how a very small amount of information immediately helps the reader (e.g., investor, partner, customer) orient themselves properly for the rest of the deck. This is for our customer, Socrates.
Tip #2: Find ways to combine key information into your narrative to make your deck more concise
Roughly 20% of the decks we review have the “Market Size” slide as the one of the first 3 slides.
And it almost always says one thing…the market is big. Unfortunately, putting this information so early is often disruptive to an effective narrative flow. Although Market Size is important and relevant, it is tangential information that can be a distraction at odds with understanding the opportunity. An alternative technique for getting attention with the size of the market is to combine the information with more important aspects of the narrative flow.
Tip #3: Combine traction and the solution to drive conviction to invest early
Only 15% of the decks we review feature customer referrals or actual market traction in the first three slides.
A solution without traction is really just an idea. You haven’t proven that you’ve solved anything. You want to eliminate as much risk from your offering as early as possible by enhancing the reader’s conviction. Introducing your product without any supporting traction in the same slide, or soon thereafter, doesn’t help the reader understand how far you’ve come in solving your problem. Inline with embedding statistics into the narrative, consider including some of the following along with your product:
Customer Testimonials
Success Rates
Total Users
Growth Rates
Applying lessons from User Experience (UX) research techniques to your pitch deck
UX research is the unsung hero of your favorite apps. A world leader in research-based UX consulting, Nielsen Norman Group have researched and documented the effectiveness of many UX techniques. We apply their forward-thinking UX methodologies to pitch decks we build for our clients.
Reduce the hard work for consuming key information (Rate of Gain)
Don’t over-burden the reader with information (Cognitive Load)
Be as succinct with your messaging as possible (“BLUF”)
Organize information for max understanding (Progressive Disclosure)
Give the deck some design basics for strong ethos (Halo Effect)
Each of these is discussed in greater detail below.
Rate of Gain
The Rate of Gain is the value a reader gets from new information divided by how much work that user needs to do to get it.
A measurement used in User Experience to measure ease of use and value to users
In the case of your pitch deck, the user is an investor, partner, or customer, and Rate of Gain measures how valuable the information on each page is divided by how many words are on the page.
This would mean that a good slide would have the most valuable information possible in the least amount of words.
How to have a high Rate of Gain in your content
One of our partners hired a highly coveted speech writer for a Series B raise and the main piece of advice — delete more words.
The best piece of free advice we can give you about your deck is to delete more words.
Cognitive Load
It’s well documented that there are limitations of one’s ability to remember things while doing a task, aka working memory. People have a very finite working memory to consume the content of your pitch. This is why you should use techniques to be as succinct as possible to convey the mostvalue.
A reader may naturally try and determine what information they need to know in order to preserve their working memory. This means giving the reader the ability to triage a page to decide whether or not they need all of the information is a good technique for keeping a user’s memory free to remember the main points.
This really forces you to boil down the words on a page to the point where you keep track of the cost and benefit of each word. Each additional word adds additional cost to the reader to try and understand.
Bottom Line Up Front (“BLUF”)
There is a concept in journalism called the Bottom Line Up Front, you can also think of this as TL;DR (Too Long; Didn’t Read). It’s the same reason that we put an abstract at the beginning of a research paper, or an executive summary at the beginning of a business plan. Respect the reader’s time and tell them the main point up-front so they can triage the page and decide if they need to look at the details or not.
If you use a “headline” based approach you will allow readers to skim the page and decide if it’s something that they think they need to invest the effort to further investigate. If the reader avoids taking in more information than they need, they can arrive at the end of the deck quickly having only read the information they cared about. This will reduce frustration and increase retention and overall satisfaction.
Progressive Disclosure
The concept of progressive disclosure in apps defers advanced or rarely used features to a secondary screen, making the learning process easier and less error-prone. For applications, this means showing the most important features front-and-center and leaving the seldom used, or less important features to be shown later or at the users request. This removes added complexity of needing to understand more features than may be necessary.
Take Google for example. The home page is literally just a search box, and the ability to search (or click I’m Feeling Lucky like I always do).
Now you’ve given the user the option, should they want more information, to go find it. In deck-writing, progressive disclosure serves two ends: keeping the deck clean and succinct, but also allowing the user ready access to any information they would need — perhaps even in an appendix.
Consistent use of font sizes (we use 32pt and 18pt fonts for everything)
Consistent messaging (Whatever you call it, call it that every time)
We’ll cover this topic in more depth later in the series.
Pulling It All Together
The slide design below does a good job implementing the UX techniques we just covered.
Rate of Gain: With only two to three lines (tops!) for the main message, the value of the information is high, and the workload to obtain it is low.
Cognitive Load: By using the headline approach, we allow readers to triage whether supporting information below the headline is worth further investigation.
Progressive Design: Byincluding the path to more information, you let users know that there is a way to learn more. In doing this you also free their minds to focus on the slide at hand.
Fundraising is always hard. Fundraising in the current climate is harder. There has never been a better time to make sure your company can stand out, effectively deliver its message, and spark the interest of investors who will be more selective than ever before. Use the Sequoia Pitch Template and our techniques outlined here to make it easy for them to understand what you do and why your company deserves to be at the top of the stack.
William E. Dyess is “Pitchmaster General” and Principal at TXN Advisors, a Washington, DC-region business consulting firm that provides corporate development, marketing and strategic advisory services. We work in partnership with executive management to save them time and advance the corporate mission by helping them create killer pitch decks, management and investor presentations, board reports, corporate dashboards and the underlying business strategy and messaging to maximize growth and value. William can be reached at wdyess@thedyessgroup.com
Email your deck to deck@thedyessgroup.com for a free deck review.
This is a Guest Blog post by Marty LeClerc, an experienced investor, portfolio manager, and investment adviser.
There is a mania hovering over the investment landscape. Bonds. Digital currencies. A large part of the stock market. Certain real estate sectors. All driven to bullish extremes. Priced for perfection. Priced for disappointment.
Someone tweeted. The only thing to fear in the financial markets is the lack of fear itself.
Bullishness seems the only option. Investors, prudent and otherwise, regret past cautiousness. A woulda, coulda, shoulda feeling…
In hindsight the past is obvious.
Regret can lead to fear-of-missing-out. Said fear leads to costly investment errors. Think Warren Buffett. What the wise do in the beginning, fools do in the end.
Big challenge for investors right now? Protect yourself. Avoid regret-induced foolishness. Avoid lasting errors.
Repeat a mantra. It is not how much money you make during a bull market, but how much money you keep once the tide turns. Make this your mantra.
Remember. No one regretted prudence going into last March. No fear-of-missing-out when liquidity dried-up and prices crashed. There was only fear itself.
That was last Spring. A time to be greedy. Today, warning signs abound. It is a time to be cautious.
Nearly everything indicates stock indices are overvalued. More so than even in 1999, the previous gold-standard for overvaluation. Only in relation to bonds is this not true. Interest rates were a lot higher then.
Speculation is rife. Take SPACs. Special purpose acquisition companies. These are blind pools of cash. Designed to take a company from private hands to a stock market listing. Call it an alternative to the traditional IPO, but with less investor protection.
SPACs ebb and flow with stock market sentiment. At tops they are enormously popular. During bear markets, no one wants them. Now they are the rage. Issuance uncontained. Setting all records. Everyone is involved. A-Rod. Colin Kaepernick. Billy Beane. Shaquille O’Neal. Some 300 companies. Raising over $100 billion. In real terms, on a par with both 1929 and 2007.
Maybe worse. One example. Churchill Capital Corp IV (NYSE: CCIV). It has cash worth a bit less than $10 a share. Only other asset some sexy plans from management. Nothing else. Currently costs $30 to own that $10. You would think paying $3 for $1 is self-evidently wacky. Not in this stock market.
Old thinking. Interest rates can only go to zero. Speculative bubbles do not happen during severe recessions. Prosperity equals a rising stock market.
New thinking. Everything is upside down.
Sobering thought-experiment by Horizon Kinetics. Assume the roaring ‘20s awaits us. Assume good times continue to roll through the ‘30s. Assume the economy expands 4% a year for 20 years.
Simple math. People will be twice as rich in 2040 as today.
Use the so-called Buffett Indicator. Assume the ratio contracts from today’s lofty levels. Down to a bit below its historic mean. By 2040.
Simple math. The S&P 500 Index experiences zero appreciation for 2-decades. Lesson. Prosperity might not translate into profits for passive investors after all.
Research Affiliates and GMO provide a public service. Excellent research for free. They follow the data. Do not trying to sell you anything. Both have arrived at the same conclusion for the S&P 500. Negative returns over the next 7 year period.
Bitcoin is not an investment. Does not generate income. Claims to be a store-of-value. Like the dollar. Except it relies on tokens. Professor Roubini says, “the Flintstones had a more sophisticated monetary system based on a benchmark: the cartoon cavemen used shells.”
No intrinsic value in a bitcoin. Only a promise of limited supply. One price-anchor. The cost of mining a coin. Runs into the several thousands of dollars. Depending on electricity rates.
Bitcoin is a haven for criminals. Tough luck if fraudsters steal it. Tough luck if you lose your key. Ledger erased. Bitcoin gone forever.
Bitcoin is bad for the environment. A rapacious energy user. BBC says mining it uses roughly the same amount of energy as Argentina, Norway or Switzerland.
Promoters say digital currencies are a medium-of-exchange.
Everyone wishes they bought bitcoin when. Up 9-fold in less than a year. Up 100-fold in just over 3 ½ years. Up 1,000-fold in 8 years.
Bitcoin is off-the-charts volatile. More than doubled since December 2017. To get that return, you needed patience. Bitcoin crashed 80%. Rallied. Crashed 50%. Rallied. Crashed 25%. Last month. Rallied. Now up 50% in 2-weeks.
The bible says there is nothing new under the sun. In 1630s Holland people were concerned with currency debasement. They sought alternative stores-of-value. They discovered tulip bulbs. The rest is history.
Tulip bulbs differ from bitcoin. A tulip bulb is edible. It has intrinsic value.
The fuel for speculation is liquidity. Money supply expanded by 25% last year. A Fed-induced liquidity-run.
Some fear an out-of-control printing press. Claim it will generate consumer price inflation. Only discernable inflation is asset price inflation. So far.
Liquidity-runs defy logic. Until they do not. Past runs ended badly. Think 1974, 1987 and 1999.
Repeat the mantra. It is not how much money you make during a bull market, but how much money you keep once the tide turns.
Bonds have never been more expensive. The cost of money never cheaper. Not for four millennia. Everyone had to pay higher interest rates. Babylonians. Egyptians. Athenians. Romans. Byzantines. Everyone paid higher rates during long deflationary periods. Think 19th Century. When money was backed by gold.
Are bonds in a bubble? Economics professors might say no. Capital is no longer scarce. Traditional premium for owning “risk-less” bonds is evaporated. Rejoice at the euthanasia of the rentier.
Common sense says otherwise. Something like $17 trillion in government guaranteed bonds are assured to lose money, if held to maturity. Investment grade corporate bonds provide nominal income. Will lose money in real terms. Junk bonds yield less than many blue-chip stocks. Will get crushed in the next downturn.
Everything is compared to what is on offer in the bond market. Interest rates determine what people pay for real estate and businesses. Works like a lever. Rates fall, everything is worth more. Rates rise, everything is worth less.
Fed says rates will be low for a long time. Too much debt. There is no other option. Wall Street assumes rates will be zero forever. Too much debt. Rising interest rates is too painful to contemplate.
Big faith in Central Banks. They walk on water. They have all the power. Masters of debasement. Servants of markets. Call it a maestro bubble. Everyone is following the yellow brick road. Wizards of Finance becoming the Wizards of Oz is too painful to contemplate. No one is ready.
Take a reality check. Repeat the mantra. It is not how much money you make during a bull market, but how much money you keep once the tide turns.
Live outside the bubble.
There is no income in fixed income. Ditch longer-term bonds. Stay within 5 years. Not a random number. Ditch junk bonds. Credit standards are beyond lax. Ditch bond funds.
Stay clear of digital currencies. Traditional stores-of-value, like gold, are better. Unlevered precious metals royalty trusts are best. They produce income.
Understand real estate’s true problem. Not COVID-19. Not Amazon AMZN+0.5%. Not eCommerce. It is the Capital Cycle. It will take years to absorb inventory.
Live outside the bubble.
Avoid compelling stories. Pay attention to cash yields. Adopt a curator’s mindset. Pick and choose securities that can prosper outside the bubble. Be idiosyncratic. Do not be a mindless price-taker!
Everyone is focused on how the world will change in the next decade. Very sexy. Very bubbly. Bezos says this is stupid. Focus instead on what will remain the same.
Outside the bubble, the playing field is surprisingly large. Quality companies on offer at reasonable prices. Companies that will be around. Priced to deliver adequate returns. Growing dividends of 3 – 4%. Probable earnings growth of 3 – 7%. No sexy narratives. No bubble required for a happy ending.
Non-stretch predictions for 2030. America and China will be adversaries. Humans will eat food. Get sick. Consume financial services. Keep a clean body. Use energy. Invest in these areas.
Defense stocks are exempt from the business cycle. They are reasonably valued in real terms. Dirt cheap in relative terms. Less than 15X earnings. Growing dividends. Own Lockheed Martin LMT-0.4%. Own General Dynamics GD+0.8%. Own Huntington Ingalls HII+3.3%. China is not our bosom buddy. Never will be.
Shares in venerable consumer brands are outside the bubble. Big powerful companies. Can weather harsh storms. Coca-Cola. Kellogg K+0.7%. Kimberly-Clark KMB0.0%. PepsiCo. If interest rates remain low, their well-covered dividends are too juicy to ignore. If interest rates rise, they will fall less.
Keep high cash reserves. Current risks in the system are ungaugeable. Be patient. The bubble will end. Some day.
The author owns shares in Coca-Cola, General Dynamics, Huntington Ingalls, Kimberly Clark, Lockheed Martin, and PepsiCo Marty Leclerc manages the Barrack Yard Global Core Portfolio. Identifying businesses of lasting value that will benefit from major long-term trends, but that are resilient enough to navigate an uncertain future, is my goal.I choose companies from the world’s stock markets; attempting to mitigate risk by relying on a robust investment process, by focusing on valuations, and by anchoring decision-making in “predictive factors.” I am a graduate of the College of William and Mary in Virginia and an Investment Advisory Representative of Barrack Yard Advisors llc., a Registered Investment Advisor in Washington, DC.
Even if you’re too young (or too old?) to know where the line “show me the money!” comes from, everyone knows the phrase “follow the money”. When it comes to attracting investors and getting them on board with your vision, it’s all about the money potential.
Many entrepreneurs, especially in the tech field, are under the mistaken impression that it’s all about the product. If the product is sexy, fresh, or disruptive, investors will be falling over themselves to put their money behind it. That couldn’t be further from the truth.
Consider the case of Bombas. What was their big idea? Socks. Hardly disruptive, right? Yet the co-founders of Bombas went onto the show Shark Tank and secured $200,000 in funding to launch their idea. Yes, they presented some nice ideas about making a better athletic sock, but they were still trying to pitch a sock. So what made Bombas so attractive to invest in?
Laser Focus
The co-founders of Bombas had a laser-focus on their product and market. From personal experience and lots of interaction with potential consumers, they understood that people were generally unhappy with the comfort of socks, especially for athletic activities. After lots of product testing and user feedback, they identified several areas of improvement for their future products.
Sales Record
By the time Bombas reached Shark Tank, they had already been through two funding rounds. Before their official launch, they secured more than $140,000 through crowdfunding. In the year after their launch, they raised $1 million from friends and family. They also had a track record of sales to show to eventual investor Daymond John, offering a better understanding of the potential return on investment.
Unique Business Model
At the core of Bombas is a business model committed to giving back. It’s not a marketing gimmick but part of the guiding principles of the company and its founders. For every pair of Bombas socks sold, one pair is given to the homeless. Not only does this uplift the spirits of consumers who are willing to pay $12 for a comfortable pair of socks, but it addresses a real need in the community, as socks tend to be the single most requested item at homeless shelters.
Take a Punch
Bombas proved that they were ready to take a punch, from consumers and in the market. Their extensive work in market research before even creating a product provided them with a network of targeted consumers who were willing to give detailed opinions and feedback on a product and how it was delivered. When the Bombas team created their initial prototypes, they were applauded for creating a better sock, but willing to listen and make changes to the product. Their team of consumers didn’t disappoint, but came back punching hard. As a result of the critical market feedback, Bombas made two additional improvements to their products before a general market launch.
Leadership Team
The co-founders of Bombas were able to convince investors of their ability and dedication to execute on the business vision. So while the product was “just socks”, the co-founders had a vision they were able to articulate to investors that made them consider “but look at what socks can do.”
Through these five areas, Bombas was able to convey who was driving the bus, who the competition was in the market, the investor’s potential for a financial return, and how consumers would relate to the product, their company, and their marketing model. As a result, Bombas grew from zero in 2013 to $4.6 million in 2015 to $46.6 million in 2017. In 2019, Bombas exceeded $100 million in revenue. By April 2020, they have donated 35 million pairs of socks.
What will your story be?
To learn more about creating an epic fundraising story for investors, contact me for a complimentary consultation by phone at 314-578-0958 or by email at ilebow@transformationsolutions.pro.
Ines LeBow is the CEO, Transformation Executive for ETS. She is a known catalyst for business operations, bringing 30+ years of hands-on experience. Ines has a long history of being recruited into senior executive roles to improve the execution of business operations and to drive revenue growth. You can see her LinkedIn Profile at www.linkedin.com/in/ineslebow, view the ETS website at www.transformationsolutions.pro, or email her directly at ilebow@transformationsolutions.pro.
It’s still happening. We hear about companies that are shutting down, laying off workers, or filing for bankruptcy because of Covid-19 or our sputtering economic re-launch. What we don’t often hear is that investors are still looking to put their money into action.
Even if your product or service isn’t targeting the “Covid economy”, this still may be the best time to get your business funded. Your competition for investor dollars may be back on their heels or simply waiting for what they perceive as a better environment to secure funding.
Prepare (and practice) your pitch using digital solutions.
Include information on the business and financial impacts of extended government mandates related to Covid (work or school shutdowns, travel restrictions, economic depression, unemployment, supply chain shortages, etc.).
Consider ways your product or service can disrupt the existing market.
Highlight members of the executive team or advisory board who have experience helping companies to navigate and thrive during tumultuous times.
Showcase the market opportunity presented by changes to the competitive landscape or potential changes from government or industry regulations.
Now is the time, because if not now, when? As the Nobel Prize-winning novelist Doris Lessing said, “Whatever you’re meant to do, do it now. The conditions are always impossible.” Or, as Napoleon Hill, the controversial self-help author on success, said, “Are you waiting for success to arrive, or are you going out to find where it is hiding?”
To learn more on how to create an epic fundraising story for digital presentations to investors, contact me for a complimentary consultation by phone at 314-578-0958 or by email at ilebow@transformationsolutions.pro.
Ines LeBow is the CEO, Transformation Executive for ETS. She is a known catalyst for business operations, bringing 30+ years of hands-on experience. Ines has a long history of being recruited into senior executive roles to improve the execution of business operations and to drive revenue growth. You can see her LinkedIn Profile at www.linkedin.com/in/ineslebow, view the ETS website at www.transformationsolutions.pro, or email her directly at ilebow@transformationsolutions.pro.
This is another awesome Guest blog post from Andre Averbug.
In a previous post, I covered the kinds of investors that support startups. In the last post, I discussed the different types of financial instruments available to startups. But how does an entrepreneur know which type of instrument is ideal for his or her business? Let’s now turn to the main questions one should ask when trying to decide between the two key instruments – equity and debt.
Whether raising capital through equity is right for you depends on how you answer the following questions:
Does your business have the potential to grow exponentially? Equity investors, such as angels and VC funds, will only buy equity in startups, i.e., companies that are working on scalable solutions and have the potential to increase the value of that equity substantially over the next several years. In other words, they will not invest in lifestyle businesses, which are businesses that may be successful and last decades, but without experiencing fast growth and giving investors an exit opportunity. Equity investors get their return when they sell their equity (exit) at a higher valuation to new investors, either private, such as a private equity (PE) fund or, if they are very lucky, through an initial public offering (IPO). Therefore, be realistic and ask yourself: Is my business a startup or a lifestyle business? By the way, there is nothing wrong with being a lifestyle business, and a friend or an uncle might even put some equity in it. However, professional equity investors will only invest in true startups.
How important is it for you to retain ownership? Some entrepreneurs are overly protective of their equity and want to maintain full ownership at all costs. This is usually not a good mindset, especially if you run a startup, given that sharing ownership with investors, management, and even staff might be key to the success of the business. You will need investors to help grow your business and more partners to align interests and have everyone onboard and working for the long-term success of the company. Remember, it is better to have smaller share of a highly successful business than 100% of nothing. So, if you feel you are the overly protective type, consider rethinking your approach – otherwise, equity may not be for you.
Do you work well with others and welcome mentorship and opinions? When you get equity partners you are embarking in a relationship that you don’t know how long is going to last and how smooth (or rough) it will be. Angels and VCs, particularly, will want to participate in key business decisions and often mentor you. They will likely want a seat at the Board. To maximize the chances of success for this relationship, be sure you can take opinions, you welcome feedback (constructive and sometimes not so much), and that you can share some of the decision making. Remember these investors are literally betting on you. They are putting money in the early stages of your venture, when risks are extremely high, and deserve – in fact, usually have the right – to have their voices heard. It doesn’t mean that they are always right and that you should avoid disagreements. Simply be open to healthy discussions.
How much support do you need, on top of the money? Equity investors usually bring a lot more than just money. They help you with corporate strategy and business development, open doors through their Rolodexes, provide industry knowledge, sit on your side of the table in major negotiations, such as sales, partnerships etc. If none of that seems important to you (really?!) and you strongly believe in your ability to grow the business on your own or with your current team, then perhaps taking a loan – if you can – would be the best approach. That is because, if your business is indeed successful, it means your equity will gain value over the years, and the cost of selling equity should be higher than taking debt.
When it comes to debt, these are some of the important questions to ask:
What is your current (and future) cash flow situation (projection)? You should not take a loan if you are not confident in your ability to commit to debt repayments, including interest and principal. If you are in the earlier stages of your company, have not broken-even yet, and don’t see it happening in the near future, perhaps debt is not for you. Debt requires some degree of predictability in your financial situation to ensure you can service it accordingly. For that reason, it is not a very popular instrument for early-stage startups (unless when offered in hybrid instruments such as convertibles), being more suited for later-stage companies and lifestyle businesses.
Do you have collateral (assets), credit history, or receivables? Banks and other lenders may still give you a loan if you don’t have enough cash flows. However, they are notoriously risk averse and will only provide you with a loan if they are comfortable with their ability to recover their loan, even if it means acquiring your assets to cover or minimize their loss. Therefore, even if you think debt is the right instrument for you, if you don’t have enough revenues, promising receivables, a credit history, or some collateral (machinery, building, inventory etc.) to borrow against, chances are you will not be able to get that credit.
Are you comfortable using collateral, including personal assets? When it comes to collateral, the question is actually deeper: It is not just whether you have it or not, but also if you are willing to borrow against it. Some entrepreneurs believe so much in their business that they literally bet their car or house on it! Even when the company itself does not have assets, the entrepreneur uses his or her own property as collateral providing personal guarantees to the bank. This is certainly not for the fainthearted and doesn’t make sense for everybody. Also, tragically, sometimes entrepreneurs expose personal assets without knowledge. Be sure to check the laws and regulations in your country to see whether your company provides you with limited liability or if creditors could go after your personal assets in case of debt default.
While this list of questions is certainly not exhaustive, it covers some of the key issues I had to ask myself during my fundraising experiences. If you have more ideas for questions, feel free to share them in the comments below!
Andre Averbug is an entrepreneur, economist, and writer. He has over two decades of international experience working in the intersection of economic development, entrepreneurship, and innovation. He has worked and lived in multiple countries across North and South America, Europe, Africa, and Central Asia.
Andre has started and run four startups, in Brazil and the US, and was awarded Global Innovator of the Year in 2009 by World Bank’s infoDev. He has extensive experience supporting companies as mentor and consultant, both independently and as part of incubators such as 1776 and the Kosmos Innovation Center, and programs like Shell LIVEWire, StartUp Weekend and WeXchange.
As an economist, Andre has worked in topics ranging from innovation ecosystems, entrepreneurship and MSME development policy, competitiveness, business climate, infrastructure finance, monitoring and evaluation (M&E), and country assistance strategy for the World Bank, the Inter-American Development Bank (IDB), and the Brazilian Development Bank (BNDES). He has also consulted for clients such as DAI Global, the Economist Intelligence Unit (EIU), TechnoServe, among many others. He holds a master’s degree in economics from the University of London (UK) and an MBA from McGill University (Canada). Andre lives in the Washington, DC area.
Recently, I was interviewed by the Montgomery County Economic Development Corporation about The Big Idea CONNECTpreneur Forum, of which they are a sponsor. Following is the transcript of the interview. I have been a Board Member of this tremendous organization for the past 4 years.
CONNECTpreneur recently entered our 9th year. To date, we have hosted 47 events, the last 4 being “virtual” events. Over 20,000 business leaders, investors, and entrepreneurs from around the world have attended our events. Our website is connectpreneur.org. Please check us out!
THE BIG IDEA
CONNECTPRENEUR FORUM
IN CONVERSATION WITH TIEN WONG, CEO, OPUS8, AND
FOUNDER & HOST, CONNECTPRENEUR
Get to know CONNECTpreneur, a unique forum which attracts the region’s top entrepreneurs, investors, innovators and game changers. Organizers of the top tech and investor networking events in the region.
WHY IS IT IMPORTANT TO MAKE CONNECTIONS BETWEEN BUSINESS LEADERS OF ALL STRIPES – CEOS, VCS AND ANGELS – TO EARLY STAGE COMPANIES?
Not just for early stage companies, but all businesses of all sizes, the old adage, “It’s not what you know, it’s who you know,” still applies very relevantly. People want to do business with people. Early stage companies, in particular, have many needs: capital, talent, customers, vendors, partners, product development, marketing, etc. and having a large and deep network gives an entrepreneur a huge advantage in the marketplace, for obvious reasons. There is a proven correlation between the size and quality of one’s network, and one’s overall success — in entrepreneurship and most endeavors.
WHAT IS THE SECRET SAUCE THAT MAKES CONNECTPRENEUR A TOP TECH NETWORKING EVENT IN THE REGION?
It’s our ability to attract the region’s top entrepreneurs, investors, innovators and game changers. We pride ourselves on organizing the top tech and investor networking events in Montgomery County and the Washington region as a whole. We think that the reason that over 70% of our surveyed attendees rate CONNECTpreneur as the “number one” tech and networking event in the Mid-Atlantic region is because of the high quality and seniority of our attendees, which is unprecedented. Over 20% of our attendees are accredited angel investors or VCs, over half are CEOs and founders, and we intentionally keep the ratio of service providers as low as possible. This makes for more meaningful connectivity among the participants.
HOW DOES CONNECTPRENEUR SUPPORT FEMALE ENTREPRENEURS AND ENTREPRENEURS OF COLOR?
CONNECTpreneur is very intentional about providing a diverse set of presenters and speakers in our programming. Our community of entrepreneurs and investors is highly diverse, and our selection committee is very tuned in to the benefits of gender and cultural diversity. We actively work with and partner with local, regional, and national players who share our values of “double bottom line” ethics which value social impact as well as financial gain. Some of our partners include Maryland Tech Council, TEDCO, Startup Grind, Founder Institute, Halcyon and Conscious Venture Labs to name a few.
WHY IS MONTGOMERY COUNTY A GOOD LOCATION FOR AN INNOVATIVE STARTUP COMPANY? AND, WHAT’S YOUR BEST ADVICE FOR SUCCESS?
Montgomery County is a top tier County nationally for startups, and that’s evidenced by numerous awesome success stories. MoCo has a tremendously educated talent base, world class government institutions, top schools, and a large base of angel and high net worth private investors who can provide seed funding. The best advice for success is to understand thoroughly your customer and their needs and pain points very deeply. That way you can get to “product market fit” more quickly, de-risk your opportunity, and be more capital efficient. Too many companies get enamored with their product and design, or culture, or getting media coverage whereas the true essence of any successful business is to provide excellent products and solutions to its customers and sell into their markets like crazy.
WHAT ARE SOME UNIQUE CHARACTERISTICS OF AN EARLY STAGE COMPANY THAT SPARK YOUR INTEREST TO EXTEND AN INVITE TO PARTICIPATE IN THE FORUM?
We are looking for presenting companies which have truly disruptive ideas, products and/or solutions which could be sold into huge markets. And of course, the most important criteria are the quality, expertise, and coachability of the founding team. We have had presenters from all kinds of sectors including life sciences, cyber, telecom, blockchain, wireless, mobility, e-commerce, marketplaces, fintech, medical devices, IoT, etc.
Learn more about CONNECTpreneur at our website: connectpreneur.org
This is a Guest blog post from Jeff Cherry, Founder and Managing Partner of The Conscious Venture Fund and Founding Partner of The Laudato Si Startup Challenge. He is a tech CEO and mentor, investor, philanthropist, and community builder.
What comes next?
I recently listened to a thought-provoking episode of the TED Radio Hour on NPR entitled What We Value. Its premise was that this economic and societal crisis in which we find ourselves is accelerating the move towards a new set of values when it comes to the practice of capitalism. Those of us in the social impact and Conscious Capitalism space are heartened to see this discussion gaining momentum, but the question remains: How will capitalism change now that the unhealthy state of business and our major societal institutions have been laid bare?
There are many indications that this shift was in the offing far before the onset of the coronavirus pandemic. Although late to the game, the statement released by the Business Roundtable in August 2019 signaled a transformative move away from the outdated notion of shareholder primacy and towards a more human and effective form of business. It certainly garnered the attention of the press. And others in the business mainstream who had been either unaware or hostile to the market forces driving this change, are now finding it hard to ignore discussions of stakeholder management and whether business should have a broader role in society.
These ever-expanding discussions about the purpose of business in society are now taking place in the context of what does a return to “normal” look like in the economy. And a growing sentiment that the normal we were experiencing — where greed, inequity, declining living standards, crony capitalism, rent-seeking, regulatory capture, share buy-backs, corporate welfare and environmental depletion were the norm — isn’t in fact normal. Nor a state of being for which we should collectively yearn. As you might imagine, I agree.
The challenge we face now then, is how do we actually execute on this new idea? Many people talk about business for good and changing the purpose of the firm. But in the real world of competitive advantage, pricing models, customer needs, shareholder demands, supplier, employee and community relationships, knowing what to do is hard. We speak to entrepreneurs all the time who are philosophically aligned with a new narrative about business. They can cite anecdotes about others who have been successful, and they lack a cognitive frame that they can use to build an organization that embodies this day-in and day-out.
I’ve written at length about why I believe a focus on stakeholders in business and capitalism needs to replace the old story. In this article, the first of a two-part series, I’ll describe a framework to begin the journey to business as an institute of societal well-being: Or Human Capitalism.
The New Narrative of Business in Society: Human Capitalism What does a new story about the practice of business and capitalism look like in practical terms?
In order to fully bring this new narrative to life, I believe we need to re-define the purpose of business as a societal institution. Then, we need to translate that definition into tools that real entrepreneurs and executives can use every day to guide how they formulate strategy, individual decision making and implementation.
When a new cohort of the Conscious Venture Lab convenes, I ask a question to frame the work we’ll be doing over the ensuing 16-weeks: “What kind of world could we create if investors, executives and entrepreneurs cared as much about people as they care about profit?” It isn’t a question I expect any of the teams to answer outright. It’s a rhetorical challenge to think about how these ideas impact their businesses and the broader society.
Over the last few months, I’ve reframed that question: What kind of world could we create if we decided our first duty in business was to simply care for each other? This is the essence of Human Capitalism.
This version of the question doesn’t pit people against profit, which I believe is a false construct. Instead, it captures the meaning we’re all experiencing in this moment: can we be a complete society if the overarching purpose of business is only to increase profits and not primarily to improve the human condition? Both of these questions are variations of the age-old investigation of “What is a business for?” Academics, economists, politicians, social scientists and businesspeople have been asking this question for decades, if not longer.
Liesel Pritzker Simmons, co-founder of the impact investing firm Bluehaven Initiative, has said, “A crisis gives us an excuse to have conviction earlier.” What we are experiencing in this moment has emphasized how interconnected we are as a society and as a world. It has emphasized the importance of health as a public imperative. The importance of economic, community and personal resiliency as interdependent societal imperatives to which individuals and all societal institutions, even businesses, need to contribute. This crisis is bringing along those who may not have reached a level of conviction to move to a more human form of capitalism had things stayed … normal.
In this new reality it’s clear that the question about what type of world we want to create can no longer remain abstract or rhetorical. The coronavirus pandemic has exposed the truth, that a focus on our interdependent well-being is necessary for society’s survival. Succeed together or fail together the choice is ours, but we can no longer hide behind a narrative that separates individual financial self-interest from our mutual survival.
In the post-COVID world, the new narrative of business in society is a narrative about authentic caring, societal resilience and collective well-being.
Practical Ways to Integrate Human Capitalism Herb Kelleher, the legendary founder of Southwest Airlines, once said, “The business of business is people — yesterday, today and forever….” But what does it actually mean to structure your business around people? What can you do tomorrow to transform the structure of your business, respond to this new reality and become the type of leader that society needs?
Caring is Job 1: Above all there is one thing leaders must do first in order to be successful in this new world: They must actually care! To be clear, leaders who embrace the idea of caring for stakeholders as a core value and primary motivation for running a business will be well-positioned to succeed in this new world. They’ll be more able to execute on the ideas described later in this article and more likely to attract talent, customers and investors in a post-COVID world of business as a vital instrument of society.
At first this seems obvious and perhaps, some would say, no different than the status quo. But the nuance of authentically treating employees, suppliers, customers and communities as individuals deserving of your care for their own sake, as opposed to primarily as fodder for creating returns is critically important. Not only to how your company will be perceived, but authentic caring — or the lack thereof — will have a tremendous impact on your competitive performance. People understand instinctively if you are treating them fairly simply as a form of manipulation for other ends. And, unless you’ve created a true culture of caring in your organization, you’ll be tempted to abandon that care when it comes into conflict with your “real goals.” The best leaders however will understand this simple truth: how we think about creating financial value is now, more than ever, clearly tied to the way we create societal value. Authentically caring is a key component of this new narrative.
“What wins in the marketplace is that you are responsible for taking care of everyone who encounters your organization” Tom Gardner: CEO and Co-Founder, The Motley Fool
With that as our foundation, there are two things that every leader can do to build caring into the operational DNA of their business:
First, adopt a specific set of guiding principals about what it means to care for each other in service of societal well-being. And second,
Institute a practical business operating system that provides a framework for living into those guiding principals.
Here in Part-1, I’ll discuss a set of guiding principles we’ve created at the Conscious Venture Lab to help entrepreneurs execute upon these cultures of caring.
Guiding Principles: The Five Promises of Collective Well-Being In order to seed this new culture of caring into the DNA of your operations, it is crucially important that you articulate and codify a set of guiding principles that the entire company can use to organize your thought processes and create operating norms, policies, procedures and metrics that will keep your culture on track in good times and in challenging times…like during a pandemic.
Companies that will lead us into a more effective model of capitalism and a future of broadly-shared prosperity have structured their business to deliver on what I call The Five Promises of Collective Well-Being, through which we vow to use business to make the world:
More just,
More joyous,
More equitable,
More sustainable and
More prosperous for all.
Let’s examine each principle:
Business as a path to a More Just society: Leaders who are best at this will work to create social justice by structuring their organizations to level the playing field and authentically create access to opportunity for all those in their ecosystem who want to contribute.
Conscious Venture Lab and SHIFT Ventures portfolio companies Hungry Harvest and R3 Score have built this promise into their business models, which drives impact and returns.
Hungry Harvest creates a more just world by providing fresh food to communities that wouldn’t otherwise have access to it and dignified work opportunities to people in need. As a result, they create scores of “Harvest Heroes” who loyally buy wholesome food from the company that otherwise would have gone to waste. In the process they have increase sales by more than 34,000% over the last 4 years.
R3Score creates a more just world by providing a dignified return to civil society for millions of formerly incarcerated Americans and allowing banks a way to engage with people they would otherwise ignore. Thereby expanding the banks’ customer base, putting financial assets to work that would otherwise lay fallow and giving the 1-in-3 Americans with a criminal record the opportunity to build a new life.
Business as a path to a More Joyous life: Leaders who bring more joy into the world will do so by focusing on a combination of the quality of the human interactions in their operations, eliminating misery as a core aspect of their business and/or creating products that bring authentic joy to more lives.
One of my personal favorite companies, Union Square Hospitality Group, uses a culture of caring and enlightened hospitality to bring joy to employees, customers and suppliers alike.
Startup Aqus Water, that was a part of the Vatican Laudato Si Challenge in 2017, has created a product that puts “three years of clean water in the palm of (the) hand(s)” of people in places where lack of clean water has been causing extreme hardship for centuries. With more than 780 MM people in the world lacking access to clean water, bringing joy will undoubtedly bring prosperity to many.
Business as a path to More Equitable communities: When leaders focus on creating a mutual exchange of value between all stakeholders, they move their organizations away from the negative consequences of shareholder primacy and create more equitable communities for everyone. Paradoxically, an equitable approach to business, or removing the shareholder blinders, often creates new paths to greater value for shareholders.
Greyston Bakery in Yonkers New York is a pioneer of open hiring. They create a more equitable world by focusing not on the tyranny of weeding people out in the hiring process but by providing the dignity of work to anyone who wants it.
Here in Baltimore, Jacob Hsu and his company Catalyte have created an entirely new way of identifying undervalued individuals who have the aptitude to become exceptional engineers. Creating new paths to equity and unleashing massive financial potential for communities, his clients and the company.
Business as a path to a More Sustainable world: The winning leaders of the new narrative think and plan for the long-term. They understand that sustainability in every sense is the key to enduring organizational health. They establish a circle of growth for the planet, the people who serve or are served by the organization and the organization itself.
Billion-dollar clothing company Patagonia has rejected the world of “fast fashion” by creating high quality, long-lasting products and offering a repair and reuse program to discourage customers from buying things they don’t need.
Business as a path to a More Prosperous existence for us all: The best leaders view value creation with a polarity, or both/and mindset. They actively look to create real wealth for employees, customers, communities, suppliers and shareholders. They work to manage the polarity of creating value for all stakeholders by asking themselves questions like: “How do we simultaneously achieve the upside of paying our employees as much as possible, and, the upside of creating great returns for shareholders?” This is in contrast to shareholder value leaders who see all stakeholder relationships as tradeoffs that need to be solved for the benefit of shareholders.
Starbucks has fed more than 10 million people through its FoodShare program, redoubled its commitment to eliminate gender pay equity gaps, and committed to becoming “… resource positive — storing more carbon than we emit, eliminating waste and providing more clean fresh water than we use …” — all while rewarding shareholders handsomely — even during the coronavirus pandemic.
Why Human CAPITALISM? In Part-2 of this series I will discuss how the tenets of Conscious Capitalism and stakeholder management will allow organizations to clear the clutter and build these principles into everyday operations.
For now, a note before we end to my main audience: The Skeptics:
I spend the majority of every waking hour thinking about how to support entrepreneurs who have previously been neglected and who are creating world changing companies despite the immense hurdles they face. I also spend a majority of that time thinking about how to invest on behalf of my limited partners in a way that will create exceptional returns. I am a capitalist who believes capitalism can and should be practiced in a way that unleashes its power to elevate all humanity. That we can create a more humane form of commerce and human cooperation. What I am suggesting is that capitalism, like any man-made system, must evolve as society evolves. To paraphrase my friend and mentor Ed Freeman, professor at the Darden School at The University of Virginia, the alternative to capitalism as we know it today is not socialism, but a better, more human form of capitalism.
For those who would push back on these ideas as leaving shareholders behind and giving away profits I would simply ask you to suspend disbelief for a bit. Take a few minutes to think not about what you might lose, but about what you might gain. What kind of world could we create if we decided our first duty in business was to care for each other? Look around…I think that time has come.
Jeff Cherry, is CEO and Managing Partner of SHIFT Ventures, and Founder & Executive Director of Conscious Venture Lab, an award-winning and internationally recognized early stage accelerator. He is also Founder and Managing Partner of The Conscious Venture Fund and Founding Partner of The Laudato Si Startup Challenge. Jeff is a pioneer in conscious capitalism and double bottom-line investing. He can be reached at jcherry@consciousventurelab.com.
This is a Guest blog post by Kerry Moynihan, Partner at Boyden.
WHY LEADERSHIP MATTERS MORE THAN EVER
A Very Brief History of Private Equity
The origins of today’s private equity industry (which I would define as including both venture capital and leveraged buyouts) date to 1946 with the foundations of American Research & Development Corp. (ARDC) & J. H. Whitney. Prior, risk capital had almost exclusively been the domain of wealthy families. Venture capital pioneers Mayfield and Kleiner Perkins were founded in 1969 and 1972, respectively. In the buyout realm, the origins of LBO pioneers KKR began at Bear Stearns with “bootstrap” investments in the early 1970s, forming the foundation of the firm as we know it today. TH Lee; Forstmann Little; Welsh, Carson, Anderson & Stowe; and GTCR were all in operation by 1980 and became major players. The modern private equity business continued to emerge in the 1980s with the realization that there were major discrepancies between public company management interests, the age old “agency problem” and the values that could be unleashed were business units to be decoupled from large public companies. The year 1980 saw some $2.5 billion raised dedicated to the emerging alternative asset class and in the decade that followed nearly $22 billion was raised by venture and buyout funds.
The wide availability of junk bond financing fueled a boom during the 1980s, followed by a crash as the stock market tanked in October 1987. High yield financing, or “junk bonds,” dried up for a time, and Drexel Burnham, the leading purveyor of these instruments, later went down. However, institutional investors had certainly picked up on the higher returns available to PE than in the public markets.
Key to these were the availability of debt financing, the disparity between management that were merely salaried and those that were incentivized by equity, and the discrepancy between public and private market information. For much of the next two decades private equity vastly outperformed the public markets. Clearly, the emergence of technological innovation in software, semiconductors, and telecom fueled the venture side, while widespread industry consolidation and globalization largely propelled the LBO market.
As ever more money flowed into pensions and other institutional investor funds, the demand for higher yields accelerated. This put more capital into the financial markets seeking higher returns and the boom continued. Of course there were blips and shocks, including the Foreign Debt crisis of 1997/98, the bursting of the dotcom bubble around 2000, the cessation of normal market activity following the 9/11 attacks, and perhaps most seriously, the major Financial Crisis after the collapse of Lehman Brothers and Bear Stearns in 2008.
However, markets rebounded, time and time again. Institutional capital, which seems to have a short collective memory, always seeks ever higher levels of Alpha (relative return) and will accommodate Beta (risk), often in unison, seemingly without independent, objective decision-making.
Institutionalization & Growth of the PE Industry
Funds were usually (relatively) small and privately held, and made individualized, partner-driven investment decisions. Yet as their size has increased, and in many cases the larger funds went out to the public markets, the industry has fundamentally changed. Now publicly traded, firms like Apollo, Blackstone The Carlyle Group, and others are, as the co-founder of one confessed to me “No longer in the business of making extraordinary, outsized returns on unique investments. We are now in the asset management business. If we can beat the S&P by 150 basis points and put huge sums to work from institutional investors, we are happy and the investors are happy.“ With the traditional model of a 2% management fee on assets under management (AUM) and 20% capture of the return on investment, the carried interest, who would not be?
Where a billion dollar fund was once considered a large player, there were over 350 by 2018 and even more today. There has been a veritable explosion in investment in the sector, as uninvested cash, or “dry powder“ at PE firms exceeded $1.5 trillion by the end of 2019. Blackstone alone, the Wall Street Journal reported, had $150 billion in cash to invest at the end of last year. Institutional Investor reported in July 2019 that 4000 funds were seeking to raise an additional $980 billion, up from 1385 funds seeking to raise $417 billion just four years earlier.
Yet in the 2010s the number of publicly traded companies stayed roughly the same while global AUM for PE firms and the number of PE-backed companies doubled, according to McKinsey & Co. It comes down to simple economics as more money is chasing fewer good assets, hence driving up prices, and reducing returns. S&P reported in November 2019 that the average pro forma EBITDA multiple was 12.9, up over 30% from pre-Financial Crisis pricing. The massive leverage, low prices, and eye-popping returns of the 1980s are but a memory. What is a simple fund to do?
Adding Operating Expertise
Importantly, funds have changed their own internal structures over the last several decades. Almost no funds had seriously tenured operating executives as part of their investment teams in the 1980s, being almost exclusively comprised of “recovering investment bankers.” The 1990s saw a bit of a change, but now almost every major fund has hired people who have more than an investment banking/finance background and have been senior operating executives who have actually run P&Ls. In many cases these are actual full partners in the funds, as the Silicon Valley venture capital community was quicker to adopt this model, typically by adding tech CEOs to their rosters, than the Wall Street LBO community. Many are termed Operating Partners or Management Associates, but whatever the nomenclature, there has been a collective recognition that strictly financial engineering and financing skills are necessary, but not sufficient, to create outsized shareholder returns.
Most of my clients and many of my good friends are private equity professionals. Without naming names, an informal survey confirms the general thesis that by training they are not prepared to run the businesses that they buy. Increasingly they recognize these facts, despite being “the smartest person in the room“ on virtually any topic (sic), in the not so distant past.
Where Are We and Where Are We Going
Fast forward to today, the late 2010s and early 2020s. The game has changed significantly, to say the least. Not surprisingly, many of the factors that led to the tremendous success of the industry in years past have changed dramatically. There is a changing reality and investment firms have, with varying degrees of success, made adjustments. For example:
Financial engineering is no longer adequate.
Given the low interest rate environment of recent years, and explosion of alternative lenders such as credit funds, beyond the traditional large banks, a giant fund enjoys little advantage over a smaller one on the availability of financing or borrowing terms. And, let’s face it, even if KKR or TPG can borrow at 25 basis points lower and with slightly less restrictive covenants than XYZ Capital Partners can, that factor alone is unlikely to be the deciding factor between the success or failure of an investment.
Globalization of the industry
Where venture capital and leveraged buyouts were virtually exclusively a US phenomenon just a few decades ago, today according to various studies, only about 55% of global private equity activity is in North America today. While Africa and Latin America are somewhat underrepresented, Europe and Asia are booming in this respect and the former may well catch up over time. It has become, as in so many industries, a much more competitive, truly international playing field.
Ubiquity of information has changed the game
The asymmetry of information that led to smart buyers and uninformed sellers is simply no longer the case. The incredible proliferation of information and ease of access on a global basis means that sellers, even of relatively small and unsophisticated businesses, have a much better handle on the overall market than in the past. An investment banker friend and I have a running joke that Old Uncle Burt, selling his cornfield in Iowa, knows that he can command 7.8 to 9.3 times EBITDA these days and will have five buyers lined up! In short, because of this the market is much more ruthlessly efficient, further evidenced by the dramatic expansion in the number of deals done and in the ever higher multiples paid for them.
The Model Still Works
The increased volatility of public markets, however, continues to make private equity attractive. What was once termed an alternative investment is certainly now very much in the mainstream for most sophisticated investors. However, the delta in returns between public markets and private markets have flagged in the last several years. As Bain & Co. noted in its 2020 Private Equity Report, “10-year public market returns match PE returns for the first time.”
Yet the current crisis, at the same time akin to the ones we seem to have every five or 10 years, and on the other hand of unprecedented scope, has obviously put an enormous dent in the wealth accumulated in the stock market. The ability to be patient and not have to respond to quarter-by-quarter earnings can allow private equity investors to take a more strategic, long-term view and ride out much of the fickle fluctuations of the financial markets.
This may seem a bit ironic, since most PE funds would love to be in and out of investments in a 3 to 5 year timeframe if possible. But with the public markets bouncing as violently as they are, private equity will remain a very attractive industry, both for Limited Partners as institutional investors and General Partners, the PE funds, as the custodians and direct investors of those funds.
Executive Leadership Matters, Now More Than Ever
Over time, more and more funds have gone to a model of backing individual executives or executive teams in what I call the “Back-able, Bankable Leadership“ model, or BBL. Both venture and buyout funds have increasingly backed executive leadership that has had prior success and will continue to do so. The proverbial “Holy Grail“ for investment funds is to find management teams that are proven and have as close to a proprietary idea as possible. By this I mean either a specific target company(ies) for acquisition or a well-developed investment thesis with demonstrable potential acquisition targets.
How much better to create a situation where you have an organic genesis of an investment, rather than competing in a broad auction scenario against many other funds. In the latter case, the “winner” of an auction may be successful in acquiring a business, but a loser as an investor, having paid too high a price at the outset.
An old saw in investing circles is that “You are more likely to win by backing an ‘A’ management team with a ‘B’ plan over a ‘B’ management team with an ‘A’ quality plan.“ At no time has this been more true than today, as many firms actually have to reinvent their business models on the fly. As we face unparalleled turbulence in the markets, especially given the latest crisis, never has leadership, true leadership, been at more of a premium. Operational excellence, coupled with the genuine ability to inspire, will always be valued. In short, today it is more critical than ever to actually run businesses better.
Effective executive leadership makes all the difference. It certainly makes me quite sanguine about the prospects for the executive search industry in partnering with private equity clients to create value. Successful investors invest in superior management and leadership, especially when competition is greater than ever and times are uncertain, to say the least!
Kerry Moynihan is a Partner at Boyden. He has had a distinguished career of more than 30 years in executive search, making a significant impact on client organizations through strategic talent acquisition and development. Working across a range of industries, he specializes in partnering with boards of directors as well as private equity firms and the C-suite executives of their portfolio companies to deliver for investors. He can be reached at kmoynihan@boyden.com.
Demonstrating to investors that your business model is sustainable, especially in times of uncertainty or jarring disruption, like we’re facing now with the Coronavirus pandemic, can give you the edge you need to get funded. In my previous article, “Now’s the Time to Get Your Business Funded: Coronavirus Edition,” I highlighted the fact that savvy investors are still looking for great investment opportunities. Those great opportunities include investing in both the idea and the one with whom the idea originated.
Pitch Sustainability In Any Market
As part of your funding story and pitch deck, it is important in today’s environment to present the ways in which you can navigate operating the business and even excelling despite quarantines and partial lockdowns being in place. Some sustainability concepts to consider include:
Business Model – Where does your business reside along the industry vertical or value chain?
Sales Model – How do you interact with and sell to customers (i.e., brick-and-mortar, direct sales, e-commerce)
Organization Model – What is the composition of your workforce? Do you require staff to be on premises? Are you dependent on contractors or outsourced partners?
Product or Service Offering – Is your offering something that will be of value during a major disruptive social or economic event?
Materials Supply – Will shutdowns like we are experiencing now impact your ability to obtain the raw materials, inputs, and supplies required to deliver your product to market?
Expertise – Who on your leadership team or advisory board has the experience and expertise in helping organizations navigate through crises and times of instability?
Finances and Cost Structure – Do you have a lean enough cost structure and a good enough understanding of the financials to ensure a proper runway for funding to growth?
Employee and Customer Sentiment – Do you have a clear understanding of the mindset your target customer has during “regular” times versus during a crisis like we’re facing today? What about your employees…do you know how a crisis will impact their ability to effectively deliver for your customers?
New Marketing or Channel Opportunities – Have you explored changes you can make to your product offering, pricing, payment terms, customer segments, delivery methods, marketing strategies, partnerships, and co-branding initiatives that would better meet the needs of the market during a crisis?
Investors want to invest in people with great ideas, but even more so with those who understand how to bring those great ideas to the market, whatever condition that market is in, successfully. Show them that you and your team have that expertise as part of your funding story and pitch deck. Now is the time, because if not now, when?
To learn more on how to create an epic fundraising story for digital presentations to investors, contact me for a complimentary consultation by phone at 314-578-0958 or by email at ilebow@transformationsolutions.pro.
Ines LeBow is the CEO, Transformation Executive for ETS. She is a known catalyst for business operations, bringing 30+ years of hands-on experience. Ines has a long history of being recruited into senior executive roles to improve the execution of business operations and to drive revenue growth. You can see her LinkedIn Profile at http://www.linkedin.com/in/ineslebow, view the ETS website at http://www.transformationsolutions.pro, or email her directly at ilebow@transformationsolutions.pro.
WINNING IDEAS - Tien Wong's Blog 